Principal Issues: Will pension benefits paid to an Indian be partially exempt from tax if the contributions to the pension plan were made from employment income that was partially exempt from tax? What portion of the pension benefits will be exempt from tax?
Position: 1. Yes. 2. Question of fact--general comments provided.
Reasons: Previously taken position that pension income resulting from employment income that was exempt from tax is also exempt from tax.
2009-031022 XXXXXXXXXX L. Zannese (613) 957-2747 March 18, 2009
Dear XXXXXXXXXX :
Re: Taxation of Pension Income
We are writing in response to your letter of February 10, 2009, in which you requested confirmation that a portion of your pension income will be exempt from tax under section 87 of the Indian Act and paragraph 81(1)(a) of the Income Tax Act ("Act"). You advise that you are an Indian, as that term is defined in the Indian Act, and that your contributions into the registered pension plan were made with employment income that was partially exempt from tax, as you completed some of your duties of employment on a reserve.
The situation described in your letter appears to be a factual one. It is not this Directorate's practice to provide determinations with respect to factual situations involving specific taxpayers, except in the context of an advance income tax ruling with respect to proposed transactions, submitted in a manner set out in Information Circular 70-6R5, "Advanced Income Tax Rulings". However, we are prepared to offer the following comments, which may be of assistance.
An Indian's personal property is exempt from tax pursuant to paragraph 81(1)(a) of the Act and section 87 of the Indian Act if that property is situated on a reserve. Although income is personal property, its intangible nature makes it difficult to determine its location. In Williams v. The Queen, the Supreme Court of Canada set out the connecting factors test to assist in this determination. The test requires identifying the various connecting factors that tie the income to a location either on or off a reserve and weighing the significance of each such factor.
If an Indian receives pension benefits for which contributions were made by the Indian with employment income that was exempt from tax, then any amounts received from the pension plan will generally be sufficiently connected to a reserve to be situated on a reserve and also exempt from tax. If only a portion of the payments into the pension plan were from employment income that was exempt from tax, then a similar portion of the pension income received from that pension plan will be considered to be situated on a reserve and exempt from tax.
We note that in situations where an Indian is making contributions to a registered pension plan from employment income that is partially exempt from tax, the Indian is required to prorate any deduction taken for those contributions. Contributions made to a registered pension plan from employment income that is exempt from tax are not eligible for a deduction. For more information, please see the "2008 Employer's Guide-Filing the T4 Slip and Summary", which is available on our website.
We cannot confirm the portion of pension benefits that would be exempt from tax in your particular situation, as this is a question of fact. Among other considerations, where the proportion of tax exempt income to taxable income has varied over the time during which contributions were made, or where the computation of the amount of the pension benefit relative to the amount of the contributions has either varied or is complex, the calculation of the tax exempt portion of the pension benefits may be complicated.
You may wish to file a form T1213, "Request to Reduce Tax Deductions at Source", or prepare a written request to reduce tax withholdings, and submit this to your local Tax Services Office("TSO") for consideration. The request should include the reason why less income tax should be deducted from the particular income as well as all supporting documentation. You may wish to include a copy of this letter. If the TSO approves the request, they will issue a "letter of authority" to you that can be given to your pension plan administrator so that the income tax withheld from your pension benefits can be reduced.
We trust that these comments will be of assistance.
Yours truly,
Eliza Erskine
A/Manager
Non-Profit Organizations and
Aboriginal Issues
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs